11 Surprising Things You Have to Pay Taxes On

In 2004, a young 12-year old
daughter of a farm family in Sonoma County, California wrote to
the producers of “Extreme Makeover: Home Edition.”

Shelby Pope asked them to
renovate her family’s home because she has a rare condition
called “polymorphous light eruption” (sun poisoning), and can’t
be exposed to sunlight.

If they could keep the UV rays
from coming through the windows, she could leave the confines of
her bedroom. So the show went to work and took
a $285,000 farmhouse and turned it into a $1.5 million
dream home. The problem was the tax bill. Aside from doubling the annual property
tax to $6,500, Pope's family owed federal and state income
tax on the “gift of the renovation”—a cool $664,500.

When it comes to paying taxes, what you don’t
know can hurt you, says Elle Kaplan, chief
executive officer of Lexion Capital Management, an asset
management firm in New York City. That’s partly because the tax
code is so complex and tangled, but it’s also because each
taxpayer has his or her own set of financial circumstances and
particulars—so one “size” doesn’t fit all.

Extreme Makeover winners weren’t the only ones to have their
elation bubble burst. Past recipients of HGTV’s Dream Home
Giveaway, for example, also got a crash course in the realities
of the gift tax: If the gift is more than $14,000, the IRS
considers it income. In fact, because of tax implications and
other issues, most winners of the HGTV contest have ended up
selling the million-dollar properties.

For 2013, you should receive a 1099-MISC form from an employer on
any income over $600, which you must declare as part of your
overall income. Even small amounts—like the interest earned on a
$500 savings account—must be declared unless it’s specifically
exempt under the tax code. Once everything’s been reported, your
final tax bill depends on your income level, your exemptions and
so on.

What the IRS defines as income may come as a shock to some
taxpayers, however.

Here are some surprising items that are taxable, according to
financial experts and the IRS. (As always, if you’re uncertain of
any tax implications, check with your financial advisor.)

1. Social Security. This is often the most
surprising tax to his clients, says Howard Hammer, CPA, of Fiske
& Co., an accounting firm with offices in south Florida. You
need to pay federal taxes on your Social Security benefits if you file as an
individual and your total income is more than $25,000. If you
file a joint return, you will have to pay taxes if you and your
spouse have a total income of more than $32,000.

2. Gift Tax. In addition to paying tax on
any large prizes you receive, you must pay taxes on monetary
gifts you receive over $14,000 in 2013 (or over $28,000 if the
gift is from a married couple). The gift tax has long been in
place, though the taxable amounts have gone up over time.

While paying taxes on luxury gifts may not come as a surprise,
families and friends often give money to help with expensive
school tuition and unexpected medical bills for older people,
Kaplan says. How you give the money makes all the difference. If
you write checks directly to the family member, it’s considered
taxable if the total annual amount is over the limit. One way to
avoid this while still helping loved ones with practical expenses
is to gift the money directly to the educational institution or
medical facility, Kaplan says.

3. Scholarships.Scholarship money is tax-free if it’s going to
a student at an accredited school and covers tuition, books,
fees, or school supplies. However, if the money is being used to
cover travel, housing, or other miscellaneous expenses, then it’s
taxable.

4. Unemployment. Unemployment income is 100
percent taxable, no matter what state you live in, Hammer says.
He recommends electing to have taxes deducted as you receive it,
rather than paying a lump sum during tax season. First-time
unemployment filers often get a rude surprise when they receive a
tax statement from their state – a copy of which is also sent to
the IRS.

5. Alimony. If you’re
receiving alimony checks from a former spouse, be
prepared to pay up to the IRS at tax time. However, not all
checks from an ex-spouse are taxable. The divorce decree must
specially categorize the payments as alimony, and any child
support payments and property payments are not included and are
tax-free.

6. Gambling. Whether you hit it big in
Vegas or at the Kentucky Derby, any gambling winnings are taxable. You can, however,
offset this down to zero if you have gambling losses. You must
have full proof of those losses through tickets and receipts.
Gambling establishments send tax information to the government if
winnings top $600, Hammer says, and winnings (even less than
$600) should be reported as miscellaneous income on your 1040
form.

7. Medical Marijuana. Businesses that sell
medical marijuana are taxed on their profits, but since marijuana
is still illegal at the federal level, those businesses are
treated like hard drug dealers at the IRS, and can’t deduct
things like rent, payroll or utilities as a business expense.
Many business owners report paying effective tax bills of 65 to
75 percent – compared to the 15 to 30 percent average for most
other small businesses.

8. Ebay. Yes, that money you made from
selling old action figures on eBay is taxable. Different rules apply,
however, depending on if your eBay
dealings are considered a business or a hobby. To determine which
one it is, the IRS uses factors like, (1) Do you engage in the
hobby in a businesslike manner? (2) Do you spend considerable
time working on the hobby? (3) Do you depend on income from your
hobby for your livelihood?

Ebay sellers also have to consider how much profit they actually
made. If you paid $5 for a book at a yard sale, and sold it on
eBay for $20, you technically made $15. But you can also deduct
any expenses you incurred in the transaction, things like driving
to the yard sale or the postage you paid. You also don’t need to
report anything you sold at a loss – like that $20 sweater you
bought five years ago and sold for $10.

9. Airbnb. The
local and state tax rules on renting out your home or a room
through sites like Airbnb.com are still hazy, so be sure to
consult a tax professional. According to the
IRS, if you rent out your home or room for fewer than 15
days, you don’t need to report the profits.

Beyond that, any income is taxable, but you’re allowed to deduct
expenses like maintenance, utilities, and mortgage interest. Some
states and cities also consider you to be in the hotel business
if you’re operating short-term rentals, and impose bed taxes or occupancy taxes.

10. Crowdfunding. Online funding platforms
such as Kickstarter.com
allow starving artists, entrepreneurs and others to solicit
financial contributions for their projects, start-ups or causes.
While some people get small donations from virtual donors, others
bring in big bucks, such as the “Veronica Mars” movie project that has
currently raised over $4 million.

Since this is a relatively new form of raising money, many
details are still being worked out with the IRS – but the general
rule is that if you raise more than $20,000 from more than 200
people, you’ll need to pay taxes using the new form 1099-K. If
the money is less than $20K, but you gave away a product to
donors, like a t-shirt or CD, you could also owe taxes if your
expenses are lower than what you took in.

11. Digital Currency. Bitcoins, an
alternative digital currency used in online transactions, has
seen unprecedented demand recently, and the currency’s value has
tripled in the past month. Tax laws on Bitcoins are still hazy
since they’re not recognized as legal currency except online, but
Bitcoin holders should treat them as stocks or other investments.

If a Bitcoin holder was to trade his or her coins for U.S.
dollars at one of the few online currency exchange sites,
that profit would be taxable.